Revenues Prove That Cable TV Is Not Dead Yet

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Includes: CHTR, CMCSA, CTL, CVC, TWX, VZ, WWE
by: Daniel Jennings
Summary

Revenues at major cable operators such as Cablevision are increasing despite streaming video.

The actual number of cord cutters – people ditching cable for streaming video – is far smaller than media reports suggest.

Cord cutting can help cable companies by increasing the demand for broadband.

Broadband is much less profitable for cable companies than television is.

The high cost of Google Fiber means it is not necessarily a threat to cable operators.

The reports of cable TV's death at the hands of streaming video appear to be greatly exaggerated. Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC), Charter Communications (NASDAQ: CHTR), and Cablevision Systems (NYSE: CVC) all posted gains in revenue over the past year.

This brief rundown of cable company revenues shows that these companies are preserving their float even as streaming video operators are penetrating their moat:

  • Cablevision reported a TTM revenue figure of $6.13 billion on June 30, 2013, that rose to $6.355 billion on June 30, 2014.
  • Comcast's TTM revenue rose by more than $3 billion, going from $64.06 billion in June 2013 to $67.33 billion in June 2014.
  • Time Warner's TTM revenue went from $21.87 billion in June 2013 to $22.40 billion in June 2014.
  • Charter Communications reported a TTM revenue figure of $7.682 billion in June 2013; that rose to $8.727 billion in June 2014.

Streaming Video Is Not Hurting Cable as Much as We Think

The revenue gains came at a time when major entertainment providers are switching from cable networks to streaming video as their primary channel of distribution. World Wrestling Entertainment (NYSE: WWE) and HBO, which is part of Time Warner (NYSE: TWX), are two of the highest profile cable programming providers to make the switch.

Time Warner is also using streaming video to distribute its HBO programming and films made by its historic movie studio Warner Brothers. Warner Brothers' current stable of "stars" includes DC Superheroes, such as Batman and Wonder Woman, and Harry Potter.

The potential loss of these programming providers is not yet affecting overall revenues at the cable operators. One reason why revenues are so high is that there are still around 100 million cable subscribers in the United States, according to the research firm IHS; that provides for a lot of float.

The number of cord cutters-consumers ditching cable-is also rather small. Bloomberg reported that only around two million cable subscribers quit in 2013. The huge number of subscriptions still gives cable providers a wide moat to protect their business. It also gives them a lot of time to prepare for the large-scale revenue losses that cord cutting could lead to in the near future.

How Cord Cutting Is Good for Cable Companies

Intriguingly, some numbers indicate that cord cutting could actually be good for cable companies by giving them a new source of revenue. The source of revenue is broadband customers that need fast and reliable Internet service over which to download all those movies and episodes.

Time Warner Cable alone reported that it had signed up 340,000 new Internet customers in the first two quarters of 2014. During the second quarter, the company reported it signed up 67,000 new customers for its TWC Maxx high-speed broadband service. The company is now rolling out TWC Maxx, which offers speeds of up to 300 Mbps in New York City, Los Angeles, and Austin, Texas.

Some cable operators, though, are finding that broadband can be a mixed bag. Cablevision reported that it lost 9% of its high-speed data customers in second quarter 2014. During the same period, Cablevision reported that revenues at its Lightpath commercial Ethernet business in New York City grew by 6.7%.

Cablevision also discovered that broadband is not as profitable as traditional cable. The company's second quarter earnings release reported that the company's Average Monthly Revenue Per Customer was $152.72, while the Average Monthly Revenue from a video customer was $174.14.

That figure calls the cable operators' revenue gains into questions. I have to wonder how much of that additional revenue comes from raising cable bills. That's a strategy guaranteed to drive customers away in the long run. It looks as if cable providers are using higher bills to cover the cost of expanding their broadband networks.

Broadband is far from perfect because it is not a toll bridge-type monopoly like cable is. Most metropolitan areas and many smaller cities have at least two residential broadband providers in town, usually the cable company and the phone company. That puts cable operators into direct competition with Verizon Communications (NYSE: VZ) and CenturyLink (NYSE: CTL).

Google Fiber Might Not Be a Threat to Cable

A long-term threat is Google's (NASDAQ: GOOG, GOOGL) Google Fiber, which is currently being rolled out in the Kansas City area and Provo, Utah. Google claims Fiber, which is really a superfast broadband and cable connection, will deliver a connection at 1000 Mbps, or 100 times faster than current broadband. That means Fiber is a technological threat to cable.

Yet Fiber might not be a financial threat to cable because of cost. The Fiber website indicates that its Gigabit Internet will cost $70 a month and Gigabit Internet plus TV will cost $120 a month-that's about the same price as cable. Google is going to have to deliver a far better product to justify those rates. It is also going to find those rates a tough sale in cash-strapped Middle America, although its free Internet service is sure to be popular.

Despite the advent of streaming video, it looks like cable operators are going to be with us for years to come and making a lot of money. The question we need to ask is, can these behemoths make the successful transition from monopolists to niche competitors in a lucrative but cutthroat business?

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author uses some Google tools in his business activities. He also uses Century Link phone and internet service.